PEER COMPANIES

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PEER COMPANIES

MUMBAI: Shares of capital goods firms are likely to gain this week, after industrial output for July exceeded estimates by a wide margin. Companies like Bhel, L&T, Siemens, Thermax and ABB have been lagging the market in the recent rally on the perception that these stocks were fairly valued.

However, the better-than-expected index for industrial production could tempt investors to pay a higher valuation for the sector as a whole, say brokers. Over the past one month, the BSE Capital Goods index has risen a little over 2%, compared with a 3% gain in the bellwether 30-share Sensex.

Most brokers are cautious on the market, but expect benchmark indices to crawl higher as many short-term players could jump into the fray to cash in on the momentum in share prices.

The Sensex rose to a fresh 31-month high of 18,823.17 on Thursday before settling at 18,799.66, fuelled by sustained foreign fund inflows and a steady stream of positive economic data. “The challenge near term still remains valuations, even though liquidity is not a problem,” said Naresh Kothari, president, Edelweiss Capital, who expects the Sensex to trade in a band between 16,000 and 19,000 near term.

“So far, a sizeable chunk of the money had been coming from exchange-traded funds. We expect more money from hedge funds in coming days, as they look to capitalise on the uptrend,” he said.

Hedge funds usually take short-term bets since they focus on absolute returns rather than returns relative to share indices. Hedge funds were very active in the Indian market, just before it peaked out in early 2008. Heavy activity by this category of foreign investors usually increases the market volatility.

The IIP data have raised the possibility of the RBI raising benchmark interest rates in an attempt to control inflation, which has shown little signs of cooling so far. But the market is divided on the issue.

“Seen in isolation, the IIP data strengthen the cause for a hike in interest rates, but higher rates could, in turn, attract more capital flows into India, because of the problems in other parts of the world,” says Rajeev Thakkar, chief executive officer, Parag Parikh Financial Advisory Services.

He says that share prices will continue to rise in the short term despite concerns over high valuations. “Our valuation may be higher relative to other markets, but in absolute terms, they are not exorbitant, as most people would want to believe. Also, we expect foreign capital flows to remain robust for a while,” said Mr Thakkar.